Up From the Ashes

While the war in Afghanistan soon may be over, with Osama bin Ladin perhaps captured or killed, winning the peace may prove to be far more difficult for the U.S. and its allies. The United Nations' efforts to create a coalition government embracing all of Afghanistan's tribal interests could well prove unworkable, at least in the near term. Just such a coalition was formed in 1991, when the former Communist government finally fell to advancing mujahideen forces. But it soon fractured along tribal lines, leading to a horrendous civil war that ended only when the Taliban came to power in 1996.

Ironically, the capital city of Kabul suffered far more damage at the hands of local warlords than it ever had under Soviet occupation. At least 50,000 people were killed in ethnic infighting during this particularly bleak period in Afghanistan's recent past.

Today the Northern Alliance, led by ethnic Tajiks, appears to be trouncing the Pushtun-dominated Taliban. Meanwhile the Hazara tribe, a Shia Muslim minority in a largely Sunni Muslim country, has positioned 1,000 fighters outside of Kabul to protect its own interests. As for bin Laden, much as Barron's speculated last month, he and his Taliban hosts have had far less support among the Afghan populace than the U.S. initially feared ("How Deep Are His Roots?" October 1).

The government of neighboring Pakistan also has its hands full, reining in millions of Pushtuns who live within its borders. After all, it was Pakistani money and weapons that greased the Taliban's rise to power in the mid- 1990s.

In the 1980s and early 'Nineties, the Pakistanis bet their cards on mujahideen leader Gulbuddin Hekmatyar, a Pushtun warlord and radical Muslim. But Hekmatyar, the ostensible prime minister of Afghanistan, eventually withdrew his forces to the hills surrounding Kabul and shelled the city in another bout of ethnic strife. Indeed, for two full decades, under both civilian and military leadership, Pakistan's efforts to become king-maker in Afghanistan have ended in bloody failure.

This week, in an effort to hasten the formation of a new government, the United Nations will sponsor a conference in Berlin for the four major Afghan political factions. But Northern Alliance leader Burnhanuddin Rabbani, whom the U.N. still recognizes as Afghanistan's president, called the talks largely "symbolic" and is not expected to attend.

The most promising solution to Afghanistan's problems, some long-time observers believe, would be to divide the country in the two. The northern zone, populated by Tajiks, Uzbeks and Hazaras, would become self-administering, as would the Pushtun south. Kabul, an ethnic mosaic of refugees from all these tribes, would be policed by a combination of local and U.N. peacekeeping forces.

Even under this scenario, however, it could take a decade before the country became unified peacefully. And success almost certainly will require some kind of long-term U.S. involvement, including substantial economic aid.

-- Richard Evans

Samsung Rising

Wireless handset sales surge; is a recovery in chips next?

S
amsung Electronics,
the world's largest computer-memory chipmaker, lifted investors' hopes and its stock price last week with news it had moved up in the third quarter to fourth place from seventh in global sales of mobile handsets. According to Gartner Dataquest, Samsung sold 7.1 million units in the period, a 7.5% global market share. Samsung displaced
Ericsson
for the No. 4 spot.
Nokia
is the market leader, followed by
Motorola
and
Siemens.

Although Samsung officials do not release monthly figures, analysts estimate sales jumped more than 20% last month on higher-than-expected demand from European markets and the introduction of a new model for 2.5G mobile telecom service, which offers video- and audio-on-demand functions. All told, Samsung is expected to export some 22 million handsets to Europe and the U.S. this year, plus an additional six million domestically. The company tends to focus on the more profitable mid-to-high-end segments of the mobile market, which has helped to offset losses in its memory chip business.

"Samsung is the most profitable handset maker in the world," says Sun Chung, who follows the company for Merrill Lynch in Seoul. Handset sales accounted for about 80% of revenues and 90% of operating profit in the third quarter. Semiconductors, meanwhile, provided only 14% of revenues and lost about 355 billion won in the quarter.

But much of the bad news in chips has been discounted, says Chung. The stock jumped 6% last week on the handset news, closing Friday at 222,000 won. That's up about 59% from its low for the year of 140,000 won September 28 and 27% since we last wrote about the company ("Down, Not Out," December 18, 2000). At the time, we suggested that the stock, then trading at 174,500 won, could be a bargain for patient investors.

Merrill's Chung believes Samsung's shares can reach 225,000 won over the next 12 months. He looks for a 30% rebound in earnings in 2002, to 16,915 won a share, which would follow a drop to an estimated 12,992 won in 2001 from last year's 34,109.

"There will be more good news in the fourth quarter that has yet to be factored into the price," he says, pointing to soaring handset sales and an expected profit recovery in Samsung's flat-panel and liquid-crystal display businesses. Chung is also looking for a moderate seasonal pickup for the semiconductor industry in the current quarter.

Next year should see a recovery in chip prices and sales, boosting the company's high-margin products, says Chung. He adds, "When the semiconductor market turns, Samsung will be ready to reap the benefits."

-- Neil A. Martin

Profits Ahead?

Bond deal boosts Xerox

One group of skeptical investors gave a major thumbs-up to
Xerox
last week. Lured by a 7.5% dividend, institutional investors snapped up $900 million worth of the company's new convertible bonds. Xerox had originally planned only a $500 million offering, but the size was increased to satisfy higher than expected demand.

Clearly things are improving at Xerox, which only months ago was rumored to be on the verge of bankruptcy. But when and if the shares will ever return to the mid-20s, where they traded when Barron's suggested that a turnaround was at hand, is anybody's guess ("Ready to Copy," May 29, 2000).

Xerox shares closed Friday at 8.22, more than double their December 2000 low of 3.75 but well below their all-time high of 63.94 in May 1999.

The new Xerox convertibles, whose interest payments are collateralized by U.S. Treasuries for the first three years of their 20-year duration, were sold to institutions and are not available to individual investors. They came to market at 50 and closed on Friday at 57.50. The bonds can be converted into common shares when the common hits 9.13. That's 25% above the price at the time of the offering and just 11% above Friday's closing price.

Xerox needed the convertible offering to be a success. The money raised will free it from the expensive line of revolving bank credit that it has had to use to keep its operations running ever since its bond rating was lowered to junk status more than a year ago, a move that triggered loan repayments and shut the company out of the short-term credit markets.

After losing money in four of the past five quarters, Xerox has made a good start on setting its house in order, eliminating its dividend, selling assets, exiting the cash-draining ink-jet market and moving to outsource half its manufacturing.

At the company's first conference with Street analysts in almost two years last week, CEO Anne Mulcahy predicted a "dramatic return to profitability" next year and noted she was "cautiously optimistic" that a profit might be made in the current fourth quarter.

Analysts, however, remain just plain cautious, noting that the predictions are somewhat aggressive. Says Caroline Sabbagha, an analyst with Lehman Brothers: "I am not yet convinced that a fundamental turnaround is under way."

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